Moody's gives Budget 09 a qualified tick, lets us keep Aaa rating

Credit rating agency Moody's Investors Service has affirmed New Zealand's Aaa sovereign credit rating after the 2009 Budget, but has warned that rising debt is a concern and New Zealand appears to have a structural problem that means its rating could come under pressure unless government revenues improve. The full statement is below:

Moody's Investors Service said that the New Zealand budget presented on May 28 indicated continuing pressure on public finances for several years to come. However, the rating agency stated that, because the country's finances are starting from a relatively strong position, the Aaa rating was not immediately affected by the projected debt path. Measures announced in the budget, including the decisions not to go forward with tax cuts in the next two fiscal year and not to contribute to the Superfund for an indefinite period, would limit the deterioration in the budget balance in the near term. However, longer term projections make it appear that New Zealand's fiscal recovery from the current global recession will be more prolonged than in most other countries, according to Moody's. "All advanced economies are seeing fiscal costs associated with the global credit crisis and recession," said Steven Hess, Moody's Vice President and lead analyst for New Zealand. "And, in the case of New Zealand, costs resulting from assistance to the financial system are small compared to some other countries. Therefore, the deterioration in the fiscal position indicates a more structural problem rather than the one-time shock coming from the credit crisis." Despite the projections in the budget of deficits that will cause gross debt to rise to 43% of GDP by 2017 before it begins to decline, New Zealand is starting from a solid government financial position. That ratio is only somewhat above 20% at present. "The good starting position results from improvement in the debt ratios that occurred during the decade prior to the crisis," said Moody's Hess. "Because the starting point for the debt ratios is low, a rising trend for the next several years does not necessarily threaten the government's rating." He added that, compared to most other advanced-country governments, the peak debt ratio projected by the government was still moderate. Furthermore, debt net of certain Reserve Bank obligations and assets of the NZ Treasury, will be considerably less, peaking at 36% of GDP in 2017 Moody's said that, while the outlook for the Aaa rating remained stable, a key consideration after the recession ends will be whether the debt trajectory indeed look likely to be maintained at or below the levels projected in the new budget. Economic growth is likely to remain low for the next few years after a drop in real GDP of 1-2% this year. "A return to higher economic growth after the recession would be supportive of the rating, but this remains problematic, given New Zealand's small scale and relative lack of diversity compared to larger economies. So, pressure on the rating could develop after the recession if government revenues do not increase sufficiently," according to Hess.